Typically a dispute with SARS will begin with an audit from a SARS official and/or a questionnaire from SARS in relation to the taxpayer’s affairs. SARS will then issue a letter of findings if it feels it has uncovered some amount which should have been assessed to tax in the hands of the taxpayer. The letter of findings will outline SARS’ arguments and position in this regard.

For example, if SARS alleges that a gain from the sale of shares was a trading gain in circumstances where the taxpayer has claimed capital gains tax treatment in respect of such sale then the letter of findings will set out SARS’ reasons for claiming that the gain was on trading account.

A taxpayer may then respond to the letter of findings with reasons why such amount should not have been assessed to tax in its hands. If the taxpayer, when responding to the letter of findings, does not convince SARS that, for example, the gain was on capital account and therefore taxable at a lower rate than a trading gain then SARS will raise an additional assessment on the taxpayer.

There are a few important points in relation to such additional assessments. Firstly these assessments cannot be issued by SARS after the expiration of three years from the date of the original assessment unless SARS is satisfied that the reason for not assessing such amount to tax in the original assessment was due to fraud, misrepresentation or non-disclosure of material facts by the taxpayer.

In this regard in ITC 1685 the court held that the Commissioner had not given proper attention to the matter and consequently was not competent to issue additional assessments outside the “immunity” of the three-year expiry period.

The court’s finding in ITC 1685, was based on the fact that the Commissioner had been aware at all material times of the true state of affairs and that there has been no misrepresentation or non-disclosure of material facts on the part of the taxpayer, i.e. the Commissioner had been aware at all material times of the circumstances surrounding the loss claimed by the taxpayer.

In Kommissaris van Binnelandse Inkomste v Transvaalse Suikerkorporasie Beperk 47 SATC 34, the taxpayer received R3 500 000 as consideration for the waiver certain rights pursuant to the settlement of a dispute with a third party.

Although this amount was mentioned in the taxpayer’s audited accounts, which were annexed to its tax return for the year in question, the amount was not included as income in the taxpayer’s return. Furthermore, the notes to the accounts contained a specific reference to this amount and stating that it was a capital receipt and therefore not taxable.

The Transvaal Provincial Division upheld the Special Court’s findings and held that on the evidence, no reasonable person could find that any material fact relating to the amount in issue had not been disclosed by the taxpayer.

Another point which arises in respect of assessments or additional assessments relates to the rights of the taxpayer in circumstances where the assessment is clearly incorrect.

Generally after receiving an assessment the taxpayer’s remedy is to object thereto and then follow a long and detailed process eventually culminating in a court case.

This process can take several years and, immediately after the assessment, SARS is entitled to claim the full amount of the tax purportedly owing by the taxpayer. In circumstances where the assessment is clearly incorrect the question arises whether the taxpayer is compelled to follow the long road of tax litigation until a court vindicates its position.

In this regard a potential alternative is for the taxpayer to challenge the assessment under the Promotion of Administrative Justice Act. In particular the assessment constitutes an administrative action and is therefore reviewable by the courts in terms of the Promotion of Administrative Justice Act. A taxpayer may therefore bring review proceedings in respect of the assessment in order to expedite the matter.

However, it should be noted that one of the obstacles in terms of bringing a review procedure under the Promotion of Administrative Justice Act is that there must be no “internal remedy” available in relation to the dispute. The question therefore arises whether the taxpayer’s right to object to the assessment constitutes an internal remedy. This seems unlikely in circumstances where the assessment is frivolous or obviously incorrect and the assessor’s actions in this regard are unreasonable.

Therefore, in circumstances where SARS wishes to raise an additional assessment in respect of a matter which has previously been assessed, the taxpayer should consider whether this issue has prescribed.

In addition where an incorrect assessment is raised by SARS, taxpayers should consider their rights to a remedy under administrative law as opposed to in terms of the objection and appeal process provided for in the Income Tax Act.

Written by Peter Dachs, Director and Joint Head in the tax department at ENS pdachs@ens.co.za